New ideas needed to lift EV residuals

In order to break into large-scale volume in the U.S. market, electric vehicles will need to seize a totally different sales-cycle approach.

As context, American consumers have been programmed — dare I say brainwashed — by Apple and Microsoft to trade up their cellphones and laptops every few years. Because of a mentality that fears constant obsolescence, EV consumers assume that their beloved product will similarly become outdated.

So, how do the manufacturers keep high residuals on the EV to keep short-term lease payments low?

This conundrum is a growing struggle, with high-residual losses at auction. Unsurprisingly, these losses could become massive on large-scale volume, with new EV customers avoiding such risk on a long-term finance or retail purchase.

And, how do the manufacturers increase the profit margin for selling the EV in today's market, especially where dealers are seeing margin compression when selling new cars?

Frankly, service and parts profits will be unable to cover the gaps.

Studies by McKinsey show the average new electric vehicle loses more than 55 percent of its original value in three years. The average three-year depreciation of all vehicles is 38 percent.

On average, if you sell a car purchased five years ago, you can expect to recover only half of the initial purchase price.

But, for electric and hybrid cars, the average depreciation is closer to 60 percent, with some models at 70 percent or more.

McKinsey also noted that EV sales have increased steadily year-on-year since 2010. However, EVs are still a small percentage of the overall market at 1.3 percent.

It's extremely costly to build EVs. Yes, batteries have come down in price but they are still exorbitantly expensive for the automakers and end consumers alike.

Carmakers struggle to recuperate those costs through pricing alone. The result: Apart from a few premium models, automakers stand to lose money on almost every EV sold, which is clearly bad for business.

Undeniably, Tesla has taught us that you don't need big retail dealers and service facilities to transact in the U.S. market. As the market leader in EV technology and sales, Tesla commands a premium price.

Can automakers and growing startups become players alongside them? Or, will Tesla continue to dominate the space? Will government policy continue to incentivize a market that is favorable to EV adoption? Will EV prices trend down while technical capabilities trend up?

The future of the EV industry remains unclear, and dealerships need to start asking manufacturers these questions before the market gets more legs.

The way manufacturers respond to these questions will set the stage for either EV movement or a continued standstill. Manufacturers are spending billions of dollars to best position themselves for the EV market, but are we looking at the future effects to the dealer network?

Time will tell sooner rather than later.

It's time to think outside the box of traditional dealership operations.

Automakers should consider partnering and collaborating with competitors.

Don't forget about your dealer partners. Help them with short-term leasing options. Incentivize them to buy back leases and resell them as certified pre-owned in their respective dealerships.

The time to work together on this exciting, yet challenging, sector of the industry is now.